Budgeting for closing: Costs and fees to get a mortgage
Most borrowers know a new loan involves a lot of paperwork. But borrowers don’t always know a new loan also involves a lot of fees and costs in addition to the monthly payments.
The amounts vary from one part of the country to the next, but the types of fees can be identified to create a budget. Here’s a rundown of what should be on the list:
Credit report: A credit report is a history of how someone has handled current and past debts and obligations, including mortgages, auto loans, major credit cards, department store charge cards and the like. A credit score is a numerical representation of the information in the credit report. The report and score are among the least expensive items associated with a new home loan.
Appraisal fee: An appraisal is a professional opinion of the fair market value of the property prepared by an independent real estate appraiser. An appraisal typically costs several hundred dollars and will be more costly if the property is large, unique or unusual compared with other properties.
Origination fee: Loan origination refers to the services associated with arranging and funding a home loan. This fee may also be called a “processing fee,” “underwriting fee,” “document preparation fee” or “doc prep fee.” Some lenders charge one fee while others charge two or more separate fees. The amounts depend on the lender’s fee structure and may be negotiable.
Application fee: An upfront application fee could be additional compensation for loan-related services or payment in advance for the credit report and appraisal.
Prepaid interest: Prepaid interest is not technically a cost, but rather payment of interest owed from the date when the loan is funded until the first regular monthly payment is due. The amount of prepaid interest depends on the amount of the loan, the initial interest rate and whether the loan is funded toward the end of the month or near the beginning of the month.
Points: Points are a type of prepaid interest that may be paid to the lender in exchange for a discount on the interest rate on the loan. One point equals one percent of the loan amount. Pay more points, and the interest rate should be lower. Pay fewer (or no) points, and the interest rate probably will be higher. Seller-paid points may be called a “buy-down.”
Impound account: An impound or “escrow” account isn’t technically a cost, but rather is a sum of money the borrower deposits with the lender to pay for homeowner’s insurance and property taxes. The lender sets aside these sums and remits what’s owed on the borrower’s behalf.
Flood certificate: A flood certificate discloses whether the property is located in a flood plain or area prone to flooding, according to government maps. If the flood risk is high, the lender may require flood insurance.
Home buyers typically pay the costs associated with the home loan; however, some sellers will shoulder some of the costs on behalf of the buyer. Sellers who are motivated and have experienced difficulty selling their home may be more inclined to offer such concessions to the buyer.